HALFTIME REPORT: Downside Sentiment, Upside Opportunity

With the S&P 500 dipping below the key 1000 point technical level, traders have been worrying all week whether the summer rally has run its course, or if it still has more upward room to move.

The Dow found itself down nearly 150 points during intraday trading, on the heels of week of positive treasury auctions and a report that industrial production gained for the first time in 9 months.

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But where do the Fast Money Traders see the stock market headed?

Word On The Street

The sentiment on the floor of the NYSE today is that things are getting more negative that the markets are due for a pullback. Steve Grasso of Stuart Frankel is hearing on all sides that traders expect a pullback, but he says, "the problem is that hedge funds have made that bet 100 points ago on the S&P. Day after day the bears are getting killed here and the bulls are loading up on their positions, buying on the dips." He sees the basic trend of subdued shorts and buying into dips being the general action in the markets right now.

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With the S&P below 1000 today Bill Strazzullo, Chief Market Strategist at Bell Curve Trading, still think there's room to the upside and that today is just a minor pullback, with the index moving towards 1100-1150 range towards the end of this rally.

The options action today has seen investors hedging themselves and buying calls to participate in the rally, says Scott Nations, CIO of NationsShares. "For the most part, people are doing stock replacement by buying index calls," he says.

President of Stutland Equities, Brian Stutland, points to the levels of volatility in the market , which remain at high levels compared to the market's movement. He thinks there was a bit of a surprising move to the downside after Friday's consumer sentiment number, but he suggests going long when the S&P dips below 1000.

Financials Sliding

In a sector that was given a boost of confidence by hedge fund manager John Paulson, financials have been the talk on the street all week. Although the sector has been virtually even for the week, shares of individual companies have experienced multiple percentage point swings in either direction. However, investors don't seem to be rushing in after today's pullback.

Bill Strazzullo advises looking at the range that the sector will be moving between: "Unless you see the XLF back below 13, the path of least resistance is still higher. I think we go to 15, or even to 2008 levels of 17 or 18," he said.

Brian Stutland adds that there has been a significant amount of put protection being bought for Wells Fargo in September and October puts. He thinks this amount of protection will allow investors to be confident when buying into pullbacks.

"For the first time in a long time we've seen Citigroup calls that are more expensive than puts. It's usually the other way around," adds Scott Nation, "this tells us that people are reaching. They want to buy calls to participate in some of these second tier names by buying upside calls."

Where Is The Consumer?

The weakness in the American consumer has again been reaffirmed by both consumer confidence and JCPenney failing to meet expected levels in consumer activity. Entering the back to school season, is there upside potential for retail names?

Steve Grasso thinks so. "They've been running on technicals, and if you wait for them to run on fundamentals it's not going to happen anytime soon. This is going to be based on recovery, not on fundamentals," he says, adding that there is buying in the space despite broader market weakness.

The Oil Trade

With Oil prices losing a bit of their momentum, off 2% during intraday trading, the commodity is now virtually flat for the month. Joe Terranova breaks it down: "The fundamental story is that we are in steep contango, we have tried to move some of the contango out of the market. We've tried to move tremendous amount of inventories out of the market, but we can't.

It has now become a technical picture, in oil, you have a classic double-top formation." He sees the movement today as the market rolling over and meeting with fundamentals, which are bearish.

Terranova is looking at Transocean, Schlumberger and Weatherford which are seeing a pullback off of Thursday's strength. Risk is being taken off these names and selling is correcting these companies to the downside, he says.

Fast & Furious: Key Questions Into the Close

With Target set to report on Tuesday, should you get in ahead of the results? Brian Stutland sees bullishness to the upside, with options behaving in line to what happened prior to Walmart's report.

With a 52-week high in Home Depot this week, industry peer Lowe's reports ahead of the bell on Monday. Should you buy? Scott Nations is a seller.

Clothing retailer Abercrombie & Fitch was one of the few names trading higher on Friday, does this mean it's time to get in? "Until the recovery scenario is off the table, you gotta buy," say Steve Grasso.

Oil has been volatile, so is there at trade here? Bill Strazzullo sees the bigger picture for oil to be bullish, with $80-85 on the upper end of the commodity's range.

Trade To Go:

Steve Grasso is watching the biggest retailer in the world, Walmart. "I have loved Walmart for some time," he said, "it's a safe haven bet." He sees Walmart trading higher if the recovery isn't as strong as people think and sees it as a great hedge for any portfolio.

Call The Close:

Bill Strazzullo: If we see a break below 990 in the S&P, we could see some weakness, but you still have to be looking for places to buy.Brian Stutland: I'm a buyer. Scott Nations: I'm a seller.Steve Grasso: You gotta be buying the market!